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Precious Metal Mining ETFs Head to Head: GDX vs. SIL

Zacks Equity Research

Precious metals such as gold and silver are enjoying a reprieve these days, thanks to the weak September U.S. job data that has dented the possibility of an interest rate hike later this month or may be this year, which could have been the first in nearly a decade (read: Precious Metal ETFs Regain Shine: Will it Last?).
Both the yellow and white metals were out of investors’ radar for most of the time this year. The blame goes largely to the prospect of an interest rate hike this year, a strengthening dollar, muted inflation across most developed nations and slowdown in key consuming countries like China. At London Gold Fixing, both gold and silver were down 9.2% and 12.4%, respectively, in the year-to-date timeframe.
However, the below par jobs’ report has raised questions over the health of the U.S. economy and the fate of the looming Fed policy tightening. Headline job gains for September came in at 142,000 versus estimates of 200,000 and the prior month’s tally of 136,000.
The weak U.S. data has also disturbed the case of a stronger dollar. The Wall Street Journal Dollar Index, which measures the greenback against a group of 16 widely traded currencies, fell 0.6% to its two-week low of 87.96 yesterday. These factors are compelling investors to turn their focus on precious metals as a store of wealth and a hedge against market turmoil.
Gold vs. Silver
Both the metals are regaining its luster lately. Yesterday, spot gold reached its highest level of $1,151.20 per ounce in nearly two weeks (since September 24), while silver touched its highest level of $16.08 per ounce in more than three months.
However, if both the metals are compared head to head, the outlook for gold is stronger than silver. This is because gold has greater storage value than silver and a lift-up in Fed rates that seemed imminent before the jobs report seems unlikely in the near future. According to CME Group's FedWatch program, traders are playing on a 31% chance of a rate hike this December, down from 44% before the release of the weak jobs data. Therefore, the yellow metal definitely has a stronger case given the prevailing near-zero interest rates, lowering the opportunity cost of holding the metal, and weakening dollar, which is the key to gold’s movement.
On the other hand, silver is used in a number of key industrial applications. But the demand for silver as an industrial metal doesn’t look that good given global growth worries and decline in manufacturing activity across the world driven by the persistent decline in oil prices, slowdown in China, and continued weakness in Euro zone and Japan (read: What is in Store for Industrial Metal ETFs After China Rout?).
In this scenario, it would be intriguing to look at two top performing gold and silver ETFs and their key differences (see all Materials ETFs here).
Market Vectors Gold Miners ETF (GDX)
This ETF tracks the price and yield performance of the NYSE Arca Gold Miners Index, which provides exposure to publicly traded companies worldwide involved primarily in gold mining. The fund holds 36 stocks in its basket. Goldcorp Inc. (GG), Newmont Mining Corporation (NEM) and Newcrest Mining Limited (NCMGY) occupy the top three positions in the basket with shares of 7.5%, 6.1% and 5.6%, respectively. Canadian firms dominate the fund’s portfolio with a 52% share, followed by U.S. (15.5%) and Australia (10%).
The product has amassed over $5 billion in its asset base and trades in solid volume of around 48 million shares a day. It charges investors 53 bps in fees per year. The fund shed around 14.7% so far this year but was up 15.6% in the past one month (as of Oct 6, 2015) (read: Will Gold Miners ETFs Turn Around in Q4?).
Global X Silver Miners ETF (SIL)
This ETF follows the price and yield performance of the Solactive Global Silver Miners Index, measuring the performance of the silver mining industry. The fund holds 24 stocks in its basket. Industrias Penoles Cp, Silver Wheaton Corp. (SLW) and Silver Standard Resources Inc. (SSRI) are the top three holdings in the fund with allocations of 11%, 10.6% and 7.9%, respectively. The ETF is also highly focused on Canadian firms with a 58% share, followed by U.S. (12.3%) and Mexico (11.1%).
SIL has gathered $146 million in assets and charges 65 bps in fees. It trades in an average volume of more than 231,000 shares. The product was down 20.1% in the year-to-date period but was up 13.7% over the last one month.
Both GDX and SIL look like a pure play on the precious metal market. However, GDX is notably cheaper and has much higher liquidity than SIL. Further, GDX focuses on top mining companies and fared well in terms of price performance compared to SIL. Finally, GDX seems a better option to ride on the comparatively bullish outlook of gold vis-à-vis silver.
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GOLDCORP INC (GG): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis Report
SILVER WHEATON (SLW): Free Stock Analysis Report
SILVER STD RES (SSRI): Free Stock Analysis Report
MKT VEC-GOLD MI (GDX): ETF Research Reports
GLBL-X SILVER (SIL): ETF Research Reports
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